1. Managing Relationships and Building Loyalty
Chapter 12
Managing Relationships
and Building Loyalty

2. Four Stages of Brand Loyalty in a Consumer
Cognitive loyalty – perception from brand attribute information that one brand is preferable to its alternatives
Affective loyalty – developing a liking for the brand based on cumulatively satisfying usage occasions
Conative loyalty – commitment to rebuying the same brand
Action loyalty – exhibiting consistent repurchase behavior

3. Based on data from Reichheld and Sasser
Loyalty is Important to Profitability : Index of Customer Profits over Time (Fig. 12.1)
Credit card
Industrial laundry
Industrial distribution
Auto servicing
(Year 1=100) 50
250
300
350 –
100
150
200
Year 1
Year 2
Year 3
Year 4
Year 5
Based on data from Reichheld and Sasser

4. What Makes Loyal Customers More Profitable?
Tend to spend more as relationship develops
customer’s balances may grow
may consolidate purchases to one supplier
Cost less to serve
less need for information and assistance
make fewer mistakes
Recommend new customers to firm (act as unpaid sales people)
Trust leads to willingness to pay regular prices vs. shopping for discounts

5. Analyzing Why Customers Are More Profitable over Time (Fig. 12.2)
Profit from price
premium
Profit from references
Profit from reduced
op. costs
Profit from increased
usage
Base Profit 1 2 3 4 5 6 7
Year
Source: Reichheld and Sasser

6. Measuring Customer Equity: Calculating Life Time Value of Each Customer
Value at Acquisition
revenues (application fee + initial purchase)
Less costs (marketing +credit check + account set up)
Annual Value (project for each year of relationship)
revenues (annual fee + sales + service fees + value of referrals)
Less costs (account management + cost of sales + write-offs)
Net Present Value
Determine anticipated customer relationship lifetime
Select appropriate discount figure
Sum anticipated annual values (future profits) at chosen discount rate
Customer Equity is total sum of NPVs of all current customers

7. Customer-Firm Relationship
Today’s marketers seek to develop long-term relationships with customers. Relationship marketing includes:
Database Marketing: Involves the use of technology by delivering differentiated service levels to consumers and subsequently tracking the relationship.
Interaction Marketing: Usually in B2B context where people and the social process also add mutually beneficial value.
Network Marketing: Common in B2B context where companies commit resources to develop positions in a network of relationships with the stakeholders and relevant agencies.

8. Types of Relationships with Customers (Table 12.1)
Type of Relationship--Firm and Customer
Nature of
Service Delivery
“Membership” No formal relationship
Continuous Cable TV Radio station
Insurance Police
College enrollment Lighthouse
Discrete transactions Subscriber phone Pay phone
Theater subscription Movie theater
Warranty repair Public transport

9. Basic Segmentation Issues: Building an Appropriate Customer Portfolio
Target customers whose needs match firm’s capabilities
Focus on value of prospective customers within each segment, not just numbers
Avoid targeting customers who might abuse:
our employees, facilities
other customers
Create a mix of segments to reduce risks of volatility during swings of economic cycles

10. Service-Relevant Segmentation Variables
Timing of service use (e.g., by hour, day, season)
Level of skill and experience as co-producer/self- server
Preferred language in face-to-face contact
Access to electronic delivery systems (e.g., Internet)
Attitudes toward use of new service technologies

11. Identifying and Selecting Target Segments (Mgt Memo 12.2)
User characteristics
demographics
psychographics
geographic location
benefits sought
User behavior
when, where, how services used
quantity/value of purchases
frequency of use
profitability of relationship
sensitivity to marketing variables

12. Portfolio of Professional Assignments (Fig. 12.4)
Major, State-of-the-art challenges for the firm’s
principals that give the firm high visibility
Demanding client assignments offering a learning experience for the firm’s most experienced associates
“Pacesetters”
Significant Projects
Routine client projects shared
among principals and associates
“Bread and Butter” Projects
Entry-level tasks for new
associates or for research
assistants & paraprofessionals
Analytical Work on Project Data

13. The Customer Pyramid (Fig. 12.5)
Good Relationship Customers
Which segment sees high value in our offer, spends more with us over time, costs less to maintain, and spreads positive word-of-mouth?
Platinum
Gold
Which segment costs us in time, effort and money, yet does not provide the return we want? Which segment is difficult to do business with?
Iron
Lead
Poor Relationship Customers

14. How Customers See Relational Benefits in Service Industries (Research Insights 12.1)
Confidence benefits
less risk of something going wrong, less anxiety
ability to trust provider
know what to expect
get firm’s best service level
Social benefits
mutual recognition, known by name
friendship, enjoyment of social aspects
Special treatment benefits
better prices, discounts, special deals unavailable to others
extra services
higher priority with waits, faster service

15. The Customer Satisfaction-Loyalty Relationship (Fig. 12.6)
Apostle
100
Zone of Affection 80
Near Apostle 60
Zone of Indifference
Loyalty (Retention) 40
Zone of Defection 20
Terrorist 1 2 3 4 5
Neither
satisfied
nor dissatisfied
Very
dissatisfied
Very
Satisfied
Dissatisfied
Satisfied
Satisfaction

16. The Wheel of Loyalty (Fig. 12.7)
3. Reduce Churn Drivers
1. Build a
Foundation
for Loyalty
Conduct churn diagnostic
Segment the market
Address key churn drivers
Be selective in acquisition
Implement complaint handling & service recovery
Enabled through:
Frontline staff
Account managers
Membership programs
CRM
Systems
Use effective tiering of service.
Customer
Loyalty
Increase switching costs
Deliver quality service.
2. Create Loyalty
Bonds
Build higher level bonds
Deepen the relationship
Give loyalty rewards

17. Rewarding Value of Use, Not Just Frequency at British Airways (Best Practice in Action 12.2)
Dedicated reservations
Reservations assurance
Priority waitlist and standby
Advance notification of delays exceeding 4 hours
Upgraded check-in
Preferred boarding
Special services assistance
Bonus air miles
Upgrade for two

18. Drivers of Service Switching (Fig. 12.9)
Service Failure / Recovery
Value Proposition
Core Service Failure
Service Mistakes
Billing Errors
Service Catastrophe
Pricing
High Price
Price Increases
Unfair Pricing
Deceptive Pricing
Service Encounter Failures
Uncaring
Impolite
Unresponsive
Unknowledgeable
Service Switching
Inconvenience
Location/Hours
Wait for Appointment
Wait for Service
Response to Service Failure
Negative Response
No Response
Reluctant Response
Competition
Found Better Service
Others
Involuntary Switching
Customer Moved
Provider Closed
Ethical Problems
Cheat
Hard Sell
Unsafe
Conflict of Interest

19. Common CRM Applications (Mgt Memo 12.2)
Signifies the whole process by which relationships with customers are built and maintained.
CRM as an enabler, offering a “unified customer interface” and allow firms to better understand and segment the customers etc. Applications include:
Data collection
Data analysis
Sales force automation
Marketing automation
Call center automation

20. Customer Relationship Strategies with CRM Systems: Key Questions
How should our value proposition change to increase customer loyalty?
How much customization or one-to-one marketing and service delivery is appropriate and profitable?
What is the incremental profit potential of increasing share of wallet with current customers? How much does this vary by customer tier and/or segment?
How much time and resource can we allocate to CRM right now?
If we believe in CRM, why have we not taken steps in that direction before? What can we do today to develop customer relationship without spending on technology?